RBI cuts key repo rate by 25 basis points

Context

  • The Reserve Bank of India (RBI) has slashed the key interest rate, repo rate by 25 basis points or 0.25 per cent to 6 per cent and has decided to maintain the neutral policy stance.

Key highlights

  • RBI projected GDP growth at 7.2 per cent for the financial year 2019-20.
  • Reverse repo rate under the LAF stands adjusted to 5.75% and the marginal standing facility (MSF) rate and the Bank Rate to 6.25%.
  • RBI expects economic growth to be in the range of 6.8-7.1 per cent in the first half of the current financial year, and in the range of 7.3-7.4 per cent in the second half with “risks evenly balanced”.
  • Inflation is likely to remain benign in the short term. Assuming a normal monsoon in 2019, the RBI lowered its CPI inflation projection to 2.4 per cent in the fourth quarter of 2018-19.
  • For the first half of the current financial year 2019-20, RBI expects inflation at 2.9-3.0 per cent, and 3.5-3.8 per cent in the second half.

Repo rate

Definition: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.

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